Credit Card Disclosures: Effective or Not?

February 22, 2012

By ALAN FARNHAM

Do credit card disclosures influence consumers' financial behavior? And if so, do they influence it for the better or the worse?

Both, a new study finds.

Today the Consumer Financial Protection Bureau meets to discuss the credit card marketplace, a year after the effective date of many of the provisions of the Credit Card Accountability Responsibility and Disclosure Act ("CARD Act"). Those provisions include a requirement that lenders disclose to consumers on their monthly statements the difference in cost between making the minimum payment due, versus some higher amount.

A study by the Harvard Business School addresses such disclosures. It finds they indeed affect consumer behavior, but not always in the way regulators might expect.

The findings come from a non-controlled experiment involving 132,000 members of the Affinity Plus Federal Credit Union of Minnesota with a collective portfolio of some 30,000 credit cards.

In the experiment, card holders were given a disclosure explaining the difference in cost to them between paying the monthly minimum and the amount they would need to pay in order to retire their whole card balance in three years.

The sample disclosure showed that if they paid the minimum, it would cost them $6,534 over 14 years to pay off their balances, but that if they paid more ($147), it would cost them $5,297 (a savings of $1,237) over three years.

The results of the experiment were mixed.

Given the disclosure, more consumers opted to pay more than the minimum, and some of them, some of the time, chose to pay the 3-year-payoff amount. But consumers who chose this option tended to be those with higher credit balances, those who paid more slowly and those with lower credit ratings. Even when paying the higher amount, they were consumers going ever more deeply into debt.

The reason, says Harvard professor Dennis Campbell, one of the study's authors, is that lenders revise the 3-year amount with every monthly statement. "It's a moving target,"he says. Not all consumers understand that.

"We can confidently say that more consumers paid the larger amount," says Campbell. "But what type of discolsure is best is an open question." A more useful disclosure, he suggests, might explain the fact that the 3-year target amount is being constantly reset, with the result that consumers who pay it will always be three years away from full repayment, never closer.